Katrina Has Had an Impact on Natural Gas and Electricity Production as well as Crude Oil Supplies
Letter to the Editor

Sir, Martin Wolf appears to be unduly sanguine about the economic impact of Hurricane Katrina ("How rising oil prices add to the world economy's fragility", September 7).

In Mr. Wolf's assessment, Katrina in itself is unlikely to prove economically important even when taking into account its likely impact on international oil prices.

A key point that Mr. Wolf overlooks is that unlike in earlier energy crises, Katrina has involved not only crude oil supply disruptions but it has also involved serious supply disruptions to natural gas, refined petroleum products and electricity production.

In particular, as much as 16 per cent of U.S. natural gas has been shut in, which has led to a very much sharper spike in natural gas than in crude oil prices, which will be sorely felt this winter.

At the same time, as much as 10 per cent of U.S. refining capacity has been affected at a time when there is no slack in the world's refining system.

Mr. Wolf also seems to overlook the fact that the present energy shock is taking place at a time when US monetary policy accommodation is being withdrawn, albeit at a measured pace. It would seem reasonable to anticipate that the Federal Reserve might soon pause in its withdrawal of monetary policy accommodation should the U.S. economy weaken.

However, it would seem highly unlikely that the Federal Reserve will actually cut interest rates to offset Katrina's contractionary impact on aggregate demand at a time when US inflation will be significantly boosted by higher energy and food prices in the wake of the hurricane.

Desmond Lachman is a resident fellow at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Daniel Hanson
    Phone: 202.862.5883
    Email: Daniel.Hanson@aei.org

What's new on AEI

image The Fed can't save the stock market again
image Obama's IRS and AP scandals cast big chill on free speech
image Organic industry's credibility eroded by misinformation about GE foods
image It's not universal coverage
AEI on Facebook
Events Calendar
  • 20
    MON
  • 21
    TUE
  • 22
    WED
  • 23
    THU
  • 24
    FRI
Tuesday, May 21, 2013 | 5:00 p.m. – 6:30 p.m.
Free beer: Liberating libations from ‘Bootleggers and Baptists’

Join us for a discussion of the history and future of federal and state alcohol regulation and competition, followed by a reception with beer, wine, and spirits.

Event Registration is Closed
Wednesday, May 22, 2013 | 5:00 p.m. – 6:30 p.m.
NCLB sanctions: Tests taken, lessons learned

Join education scholars and practitioners for a discussion about the latest NCLB research and its implications for future education policy.

Thursday, May 23, 2013 | 12:00 p.m. – 1:30 p.m.
Competing visions of the common good: Rethinking help for the poor

What shared commitments do we have as citizens and neighbors to care for one another? How can a proper ordering of America’s political economy enable the most people to have the best life? At this event, Rep. Frank Wolf (R-VA), a longtime champion of human rights causes, and AEI President Arthur Brooks will join Wallis in addressing these and other questions.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.